If you’re a contractor who trades as a limited company, this 2018/19 year-end has been particularly challenging. As well as filing company accounts, the majority have had to incorporate new software to meet obligations set by the Making Tax Digital initiative.
Now is a good time to start making plans for the next year and make some changes that will really help grow your business and boost your income. After all, having filed company accounts, you’ll have all the paperwork you need to make the right decisions about your business.
Here are some important points to consider for the coming year to reduce the admin and hassle that comes from bookkeeping problems.
Despite the collapse of Carillion shining a light on the issue of late payments last year, it continues to be an issue for many contractors.
The Federation of Small Businesses is demanding that the government introduces measures to end a culture of late payment and “supply chain bullying”. It is not wrong, as late payments are a danger to many small contractors.
Remember, being organised can help get many customers to pay on time. Always be clear about your payments policy and get it agreed up front, issue your invoice promptly with correct details, PO numbers and to the right person; and start chasing for payment before it is due – not once it is already late.
It’s also worth considering how much time you allow customers to pay you; it may be worth reducing this to get payments sooner. It may come as no surprise that the longer a customer waits to pay, the less likely it is that they will.
Not all late payments will be cynical, as sometimes customers simply forget. It’s down to you to make sure they are reminded, and that can be tough after a long day.
The good news is that there are plenty of online tools available to support you in your efforts, many of which come free of charge. Pandle, for instance, automates the process of chasing and reminding customers for you, which is something that will have an immediate impact on reducing the number of debtors you have.
Payment retention is another hot topic that could directly affect your business. Payment retention of between 5-10% is not unusual for most electrical contractors, and the money is held on account and meant to be returned within 12 months of completion.
What happens when the main contractor has spent the money or simply forgets to pay? Delays are common, with some subcontractors waiting up to three years for payment, something that hits cashflow hard. This situation is untenable for many contractors.
Hopefully the government will legislate to put in safeguards for contractors, so they always get their money. In the meantime, there are at least some steps you can take to make sure you receive that final payment. Importantly, be organised about chasing down debtors ahead of any retention coming due – don’t wait for them to come to you.
Having completed your accounts for the year-end, you should have a clear snapshot of your financial health. But for managing your business, the key document is your cashflow forecast, done on a monthly basis or even weekly in tough times, so that you know how much money the business is paying out and how much money it has coming in each month.
Many businesses that go under are not loss making. They simply run out of cash because there is not enough coming in and too much going out leaving, so they can’t pay for vital costs such as salaries, tax demands and equipment.
The forecast should include your material costs, rent and any employee salaries, as well as big lumpy payments like your annual corporation tax, quarterly VAT and large ad-hoc payments. These are particularly important because, if you have not set aside money, you may well not be able to pay them.
Beware your customers
Now is the time to audit your client list and ensure you avoid those who are not paying enough for your time, and also be wary of becoming over-reliant on one or two customers for work.
It is a lesson to all contractors that while a large customer might seem a good idea when business is quiet, it could have disastrous consequences if the contract terms are too onerous or if big commercial customers start taking advantage of the relationship.
Taking the time and care to put your finances in order will make life easier for the next year, showing you how much money you have to invest and grow your business. Now is the time to get started.
Lee Murphy is the founder of Pandle (www.pandle.com) the cloud bookkeeping software specifically for small businesses and the self-employed.